Buying an Investment Property
There are many factors to consider before deciding to buy an Investment property, including:
• The % of Rental Return on your investment
• The potential for Capital Gain
• How much capital you will invest
• How much you will borrow
• How to structure your Mortgage
Also, will you manage and maintain the property yourself, or use a Property Management company? There can be many benefits to using a Property Manager (and it’s tax-deductible), but you must choose the Property Management company very carefully.
Rental Return On Investment
The goal is to have a minimum of 2% more than the Mortgage interest rate. How to calculate the percentage of return:
Gross Rental Return
Annual Rental Income / Total Property Costs x 100
Net Rental Return
Annual Rental Income – Annual Expenses / Total Property Costs x 100
Total Property Costs: As well as any borrowing, include all other expenses involved in the purchase.
Annual Expenses: Include all costs, such as Property Management, Rates, Capital Gains & Leverage.
Buying an investment property below market value, and/or in an area which may see increased house prices, are ways of trying to achieve Capital Gain. Of course increased property values aren’t guaranteed.
Leverage: the more you have borrowed (the more ‘leveraged’ you are), the higher the risk if the property’s value goes down, but, the higher your return will be on your original investment, if the property’s value goes up.
Tax Benefits & Negative Gearing
Always seek professional tax advice, especially regarding Negative Gearing.
When investing in Residential property, some expenses may be tax deductible, and Interest-only loans increase the amount of tax-deductible expenses.
IRD’s summary of Rental Income Tax Rules (pdf), includes a section explaining which expenses are tax deductible.
Negative Gearing: When you make a loss on your investment at the end of the Financial Year, due to expenses and outgoings being higher than the rental income. This is common early on with an investment property, and the loss can be offset against your income tax.
Long-term, a negatively geared rental property may see Capital Gain, but again there are no guarantees, so it may not be a suitable strategy for investors nearing retirement.
Before buying any property, it’s important to follow a thorough due diligence process.
Contact Valuation Partners